The purpose of this topic is to look at the nature and purpose of the science of economics. The methodology is studied. A distinction is made between positive (or descriptive) economics and normative (or political) economics. Different branches of economics are classified. Some pitfalls of economic analysis are mentioned.
NATURE OF ECONOMICS
Economics is a social science that studies the human behavior in consuming, producing and distributing goods and services. It recognizes that productive resources are limited, and that all people’s material wants cannot be satisfied. It seeks to find the most efficient utilization of productive resources for the purpose of attaining the maximum satisfaction of human material wants. Economics usually examines problems from the point of view of a society.
The science of economics uses models. Models are simplified structures of the real word using many generalizations and assumptions. Hypotheses are first proposed. Each hypothesis is tested with empirical data. If verified the hypothesis becomes a theory, law or principle. Models are also used to make predictions.
Economics is concerned with the material well-being of people. It seeks to explain why and how this is achieved.
A model is a simplified structure of the real world which depends on various generalizations and assumptions. Models are used in descriptive economics to formulate principles and in political economics to propose policies.
Usually, a model of an entire country requires that all workers be assumed to be exactly the same. All goods produced are also assumed to be the same, as if only one good were produced. Likewise, all tastes are assumed to be the same.
It is a common assumption which states that nothing else changes.
The law of demand establishes the relationship between the quantity an individual is willing to buy, and price. It is usually necessary to keep income unchanged, and assume that tastes do not change. Otherwise, quantity could change because of changes in income or tastes, and nothing could be said about changes in quantity due to price changes.
The purpose of descriptive or positive economics is to study what is. Models are used to derive the theories, laws and principles which can be observed in the relationship between economic agents. Often the relationships are stated in mathematical terms and with the use of graphs. Two events which change in the same direction are said to be directly related (and inversely related if they change in opposite direction).
The economist will, for instance, try to identify the factors which explain why firms wish to hire employees. That may be, for instance, the need to sell more products.
The purpose of normative or political (or policy) economics is to study what should be. Forecasts are made using models. The predictions are then compared to commonly accepted goals of our society (such as that of full employment, economic freedom, equity) on the basis of standards, values or norms (such as a higher standard of living is desirable). Policies, or sets of recommended actions, are then derived from the comparison.
Once the economist has determined that selling more products will cause firms to hire employees, he/she may recommend to elected officials needed actions to stimulate sales if many workers are unemployed.
The following is a list of the major economic goals: 1) economic growth, 2) price level stability, 3) economic efficiency, 4) full employment, 5) balanced trade, 6) economic security, 7) equitable distribution of income, and 8) economic freedom. Economic goals are not universally accepted, and their degree of importance can vary considerably among nations. In addition, economic goals are not always complementary. They may, in fact, be conflicting or mutually exclusive.
FALLACY OF COMPOSITION
One of the pitfalls of economic thinking, which results from stating that what is true for one is not true for all.
One individual can find solitude in a forest. When many individuals seek solitude in the same forest, none will find solitude.
POST HOC FALLACY
The post hoc fallacy is an example of a pitfall frequently encountered when attempting to solve economics problems. It is the incorrect belief that when one event precedes another the first event is the cause of the second.
Macroeconomics is the study of relationships and policies as they relate to an entire country.
Unemployment may affect everyone in the country to some extent. Another typical preoccupation in macroeconomics is what all the individuals of a nation want to buy. For instance, this will determine what firms should produce, and therefore how many people they should employ.
Microeconomics is the study of behavioral relationships and economic policies as they apply to individual participants (households and firms) in a market economy.
Microeconomics is concerned with what one single individual will want to buy. Likewise, it is concerned with what one single firm may want to sell. Such a study may shed light, for instance, on how specific goods are priced.
Graphs are used extensively in economics. They provide a visual representation of the relationship between two variables. The independent variable is usually on the horizontal axis of a graph, while the dependent variable is usually on the vertical axis.
A direct (or positive) relationship occurs when two variables change simultaneously in the same direction. When two variables are directly related, the curve is upsloping as viewed from left to right.
A inverse (or negative) relationship occurs when two variables change simultaneously in opposite directions. The curve of an inverse relationship is downsloping when viewed from left to right.